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Ray Grabanski column: Grains recover after big losses early on

Wheat Wheat was mixed as a result of volatile market situations. Both Kansas City Board of Trade and Chicago Board of Trade finished the week lower after heavy losses early in the week, while the Minneapolis Grain Exchange held gains and finished...

Wheat

Wheat was mixed as a result of volatile market situations. Both Kansas City Board of Trade and Chicago Board of Trade finished the week lower after heavy losses early in the week, while the Minneapolis Grain Exchange held gains and finished sharply higher. The week began Jan. 22 as markets were closed Jan. 21 for the holiday. Early this week wheat fell sharply lower on KCBT and CBOT as profit taking set in after a period of gains. In addition, a slide in equities, a weaker outside market and fear of recession pushed prices lower. These reasons also pushed other commodities lower, which provided spillover pressure that pushed wheat lower yet. MGEX fell lower Jan. 22 as it ran out of buying interest for the day and fell lower with other two exchanges. Otherwise, MGEX has led the upward movement in wheat because of a strong demand for spring wheat and with supply concerns supporting gains. Later in the week, KBOT and CBOT turned slightly bullish following MGEX but with light volume of trades as traders wait to see how the market reacts after a volatile beginning of the week.

In other news this week, the president of the Wheat Growers Association announced that Argentina will reopen its wheat export registry soon. This will only be for a limited amount, approximately 1.5 million tons. This, however, was not confirmed by the ag secretariat, who knew of no official opening or the registry. Argentina closed its export registry in December because of fears over supply after frost damaged its wheat crop. Overall, the outlook for wheat is bullish with strong demand and concerns over historical lows of stocks looking to support gains. In addition, there is still a need to secure acres this coming spring to make up for losses in winter wheat seedings.

One of the many questions posed lately has been, "If the U.S. has an economic problem with a slow economy, how will current Federal Reserve chief Ben Bernanke respond?" We have gotten at least some of that answer this Jan. 22 after the Jan. 21 emergency meeting of the Fed, with an announcement of a historically large interest rate cut before the U.S. stock market opened the morning of Jan. 22. That actually is a much stronger response than almost anyone expected. While the Fed cannot control individual decisions, and thus in the end may not be able to offset all the individual decisions made in the economic world, one has to be impressed with how willing it is to offset an economic decline in this country. While the Fed officials seem concerned about our slowing economy, their worry over inflationary pressures seems much subsided in comparison. The expansionary policy currently being pursued is likely to push inflation even higher (if we can stop our economic slide) and lends credence to the idea that the U.S. government might even be interested in seeing some inflation to help stem the increasing foreclosures likely in the housing crisis.

As we have mentioned several times, inflation has been nothing but kind to commodity prices historically. At present, the gamesmanship has begun, with the commodity sector seeing the first rapid changes, with new, higher valuations beginning in 2002 and turning rapidly more pronounced in the past two years (especially in grain prices). Markets likely aren't done with their job, and even though we can't always understand what the markets are trying to accomplish, there usually is a reason for markets to do what they do (we may have to remind ourselves of this in the housing sector). It's very likely market changes in land values will follow, with labor and capital also seeing some rapid adjustments as well in the coming years. The producers who survive it will not necessarily be the most aggressive nor the most conservative, but those who are able to keep themselves flexible in production decisions, allowing the market to dictate production.

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CornCorn futures were neutral with losses early on but with strong gains to finish the week. Corn began the week moderately lower correcting itself after a week of gains. By Jan. 23, corn fell sharply lower on speculative liquidation, and with no support from outside markets such as crude oil, traders found it difficult to justify a big buying spree. In addition, a slide in the equity markets and improved weather conditions in South America's corn growing regions added to the bearish pressure. Corn closed a limit up Jan. 24 after receiving a bounce from strong outside markets and with concern that recent losses had been overdone. Speculative buying pushed prices higher with support also coming from a weaker U.S. dollar. By Jan. 25, corn had managed to regain much of the early losses, in the process reminding people how treacherous futures markets have been as of late.

While we signed off in the last column with "Stay tuned, as the current commodity boom in energy and grain prices and sagging U.S. dollar might be the beginning of a whole new saga. How it plays out might end up affecting virtually every business and person in America, and perhaps the world!," little did we know we would see a huge sign of that globalization influence on the world economy by the next week. It's starting to become clearer that the commodity price boom the past two to five years is part of a whole-world revaluation of many resources (including commodities, land, labor, capital and management) that is playing out in almost the entire world. The frantic losses in financial markets and the resulting emergency rate cut on the part of the Federal Reserve are nothing but good news for farmers right now. The willingness of the Fed to ignore inflation for the next few months, at least, along with tight supplies of nearly every grain open up tremendous possibilities. For now, producers should be patient and let the market work for them.

SoybeansSoybean markets turned the week around a huge collapse early on. The open after the extended weekend was tough, with unstable equity markets causing a meltdown in financial markets worldwide creating a flurry of selling the grain markets. The situation was similar to that of around six months ago, when another selloff in financial markets turned funds skittish for a few days. That time, the selling lasted around a week, but markets eventually did recover. The situation appears to be similar this time as soybeans turned higher by the close Jan. 24. The Jan. 23 limit-lower move was followed by a near-limit-higher move Jan. 24 and another higher close Jan. 25. This week was a great example of how grain markets are not nearly as isolated from outside instances as they once were. However, while the short-term effects of the economy were negative, the longer-term implications of the week are very bullish.

One of the questions I have posed recently is the concept of inflating commodities and "'Stagflation"' being possible at the same time. In the last few days, we have learned how important it is to widen our horizons and look beyond the grains for price direction. The world markets over the long weekend reacted to what is perceived as an inevitable recession (or worse) in the U.S. with a 5 percent to 10 percent drop in stock values. Our Federal Reserve FOMC reacted with its strongest interest rate change in two decades, a 0.75 percent drop in interest rates. This turned commodities on a dime, with prices moving sharply lower early in the week in a strong reaction. If you didn't see a connection between commodity values and the world economic situation before, perhaps you now might be inclined to look further.

What does this mean for grain producers? An inflationary economy has only had benefits for grain prices in the past. Speculative traders, such as those so actively involved at present, cease these opportunities to shift investments away from weaker financials and much more heavily into tangible commodities such as grains and metals (less likely to lose value). The strong rate change earlier the indicates the Federal Reserve is now willing to ignore inflation in favor of preventing a recession, a huge boon for grain markets in the U.S.

Small grainsSmall grain prices remained strong despite large setback early on in actively traded wheat contracts. However, that open market correction appears to be temporary and, as such, should have little effect on the contracts and bids offered for barley and durum. Durum contracts again have risen to more than $20 in some areas, maintaining a big premium to hard red spring wheat futures (even at historically high price levels). New crop contracts are not quite there yet, and we are expecting further moves higher in order for buyers to compete with outstanding prices for wheat as well as soybeans and other competitive crops. Basis levels have strengthened for all wheat as well, drawing further attention to shortages. Good-quality durum and barley should command an exceptional premium. Cash barley in Minneapoliss was quoted at $5.95 for feed and $7.10 for malt.

Dry beans

Dry bean contracts continued to be offered at decent levels although there was little fresh news to affect things one way or another. The main influencing factor, however, continues to be other grains as unheard of prices in wheat, soybeans, corn and other specialties creates a lot of competition. Many buyers are offering $31 for 2008 contracts, but we think prices will have to be better than that if producers want to switch out of another crop, particularly soybeans where input is a fair amount less. Producers, as with all crops, should be patient in their decisions this year, letting the market work for them.

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Oilseeds

Canola markets have traded lower since peaking Jan. 14. Since that time, however, traders have been able to consolidate the boost provided by USDA monthly reports, and since Jan. 23, have been slowly climbing higher. Technically, this market is nearly identical to soybeans, and in reality, has much the same problem. Canola, along with flax and to a lesser degree sunflowers, all must compete to secure production against high-publicity prices in corn, wheat and soybeans. Oilseeds as a whole are shorter on supplies, putting more urgency behind buyers to be aggressive. Pro Ag remains friendly to all crops, at least until later this winter when planting decisions become more firm. Even at that point, old crop prices are likely to remain attractive.

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